U.S. price pressures slowed in May, supporting the case for the FOMC today to pause their rate-hike campaign. The federal funds futures market is discounting only a 10% chance of a +25 bp FOMC rate hike today.
The U.S. May CPI eased to +4.0% y/y from +4.9% y/y in Apr, better than expectations of +4.1% y/y and the smallest increase in over two years. Also, May final-demand PPI eased to +1.1% y/y from +2.3% y/y in April, better than expectations of +1.5% y/y and the smallest increase in more than two years.
U.S. policymakers, including Fed Chair Powell, have signaled their support to skip a rate hike at today’s FOMC meeting while still leaving the door open to future tightening if needed. The U.S. June payroll report and CPI reports to be released next month will determine what the Fed will do at its next FOMC meeting on July 25-26. Market odds for the Fed to raise the fed funds target range by +25 bp at the next FOMC meeting on July 25-26 currently stand at 66% (assuming no rate hike today).
The markets will focus on Fed Chair Powell’s post-meeting comments and on the Fed’s new dot plot, which will be released today, to indicate future policy moves. The FOMC’s last dot plot, released in March, forecasted a 5.1% federal funds rate by the end of this year, which is basically right at the current effective federal funds rate of 5.08%. Therefore, if the FOMC does not raise its dot plot, then the implication will be that the Fed thinks its rate-hike regime is over. The dot plot is forecasting a decline in the federal funds rate to 4.3% by the end of 2024 and to 3.1% by the end of 2025.
However, the markets are generally expecting today’s FOMC decision to be a “hawkish skip,” meaning the FOMC is expected to possibly raise its dot plot forecast or at least maintain a tightening bias. The labor market remains very tight and inflation remains high, which means that the FOMC cannot afford to start sounding dovish or encourage the markets to expect rate cuts by year-end. The markets today will therefore react mainly to the extent of the FOMC’s new dot plot and tightening-bias language.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
